Industry Responses to Tax Changes
Trucking companies, ranging from large carriers to small fleets, are evaluating how the federal Tax Cuts and Jobs Act will affect their revenues and are developing strategies to align with the new guidelines, including the potential for corporate restructuring, according to accountants.
Long-term Considerations
“Currently, most discussions focus on the long-term impacts of these changes, such as the potential future increase in ‘C’ corporation tax rates,” stated Randolph Smith, a tax partner at Grant Thornton, during an interview with Transport Topics. “We began these conversations in December, and we’re now delving deeper with our clients.”
Business Structure Implications
The effects of the new tax law on trucking businesses will vary depending on the type of business entity. Generally, there are three structures: C corporations, which are publicly traded entities valued at millions; S corporations, which pass income to their partners; and sole proprietors, such as independent contractors with one truck.
Tax Rate Changes
For C corporations, the tax rate has been reduced from a maximum of 35% to 21%. For S corporations, tax calculations will involve a combination of W-2 wages and taxable income, with many asset-based carriers likely benefiting from a 20% deduction on taxable income, lowering the top tax bracket from 37% to 29.6%.
Advantages and Disadvantages
“Despite the lower rate for C corporations, they face double taxation on dividends, while distributions from S corporations generally aren’t taxed,” noted Mark Flinchum from Katz, Sapper & Miller. Conversations are already taking place about potentially transitioning from S to C corporations, although this can be complicated and varies by situation.
Independent Contractors’ Choices
Independent contractors must decide whether to remain sole proprietors or switch to S corporations. Kevin Rutherford, an accountant working with owner-operators, pointed out that while sole proprietors incur both income tax and a 15.3% self-employment tax, forming a pass-through corporation can offer ways to minimize tax liability, though it requires reasonable compensation as mandated by the IRS.
New Rules on Deductions and Equipment Purchases
Company drivers can no longer deduct miscellaneous expenses on their Schedule A forms, which could lead to an increased focus on per-diem pay to compensate. For equipment purchases, the elimination of like-kind exchanges means carriers can now claim 100% bonus depreciation on new and used trucks, a significant short-term gain under the new law. Yet, fleets with heavy debt may be affected negatively by limits on pre-tax interest expenses.
